Australian Central Bank Sees Scope to Ease, Watching Business Investment

Thursday, 7 Feb 2013 | 8:36 PM ETReuters

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Australia's central bank has trimmed its growth and inflation forecasts as a coming peak in the mining investment bonanza, government spending cuts and a high currency keeps economic growth below potential.

The Reserve Bank of Australia's (RBA) quarterly report on the economy out Friday put special emphasis on whether non-mining investment would pick up in time to fill any hole left when resource spending crests later this year.

Given that risk, the central bank stood ready to ease again if needed even though it held rates steady at its February policy meeting this week.

"The current inflation outlook would afford scope to ease policy further should that be necessary to support demand," RBA Governor Glenn Stevens wrote in the overview of the 68-page report.

"Given the significant monetary stimulus already in place, and signs of lower interest rates having some of the expected effects, the Board judged that the stance of monetary policy remained appropriate for the time being," said Stevens.

The RBA has slashed 175 basis points off its cash rate since late 2011, taking it to a record-matching low of 3.0 percent.

Though it held rates steady this week, markets suspect it will have to cut further given softness in parts of the domestic economy, especially those exposed to foreign competition and the high local dollar.

The RBA now expects the economy to grow around 2.5 percent over 2013, from its earlier forecasts of around 2.75 percent, before picking up to just under 3 percent over 2014.

It also trimmed its forecast for underlying inflation by a quarter point and expected it to stay close to the middle of its 2 to 3 percent target band for the next two years.

"Overall, the soft outlook over the next year or so reflects a number of factors: mining investment is expected to peak, both fiscal consolidation and the persistently high level of the Australian dollar will weigh on growth, and there is little sign of a near-term pick-up in non-mining business investment," it said.

The central bank also expected employment growth to remain below the pace of population growth for the next couple of years, which meant the jobless rate would drift gradually higher from the current 5.4 percent.

On a more positive note, the RBA said the recent sharp rebound in iron ore and coal prices, the nation's two most valuable exports, should see a small increase in the terms of trade early this year.

It also said spending by miners will remain high for some time given the large amount of investment currently underway, or having been committed to.

The RBA sounded more optimistic about the global economy, particularly China, the country's single biggest export market. It saw further signs that the Chinese economy has stabilized, underpinned by public spending and accommodative financial policies.

"Overall, the risks to the international outlook appear to be more balanced than they were late last year. The most obvious downside risks stem from the problems in the euro area, where prospects for a pick-up in growth remain fragile," it said.